Timothy J. Bartik is a senior economist at the Upjohn Institute for Employment Research. The views expressed here are those of the author, and should not be construed as official views of the Institute.

By Timothy J. Bartik

Proposal 1, a statewide ballot proposal on the August 5 ballot, presents Michigan voters with a difficult choice. The proposal eliminates a problematic tax and holds harmless local governments, but contributes to long-run problems for state public services. How citizens should vote depends upon what may happen if the ballot proposal is voted down.

Proposal 1 eliminates most local “personal property taxes” paid by manufacturing businesses on machinery and equipment. These taxes are difficult to accurately assess. Furthermore, such taxes fall heavily on higher-wage industries that compete in the national economy. Eliminating such taxes may boost the state economy, if it does not cause public services to deteriorate.

To help local governments, who would suffer a long-run revenue loss of about $600 million annually in personal property tax revenue, the proposal provides replacement revenues. This replacement mechanism prevents significant loss of local public services.

The main problem with Proposal 1 is the lack of adequate replacement revenue. The $600 million in funds for local governments are provided in part by a new, smaller statewide tax on business personal property, which would eventually provide about $100 million annually.

The remaining $500 million that would eventually be needed for local governments is not financed by new revenue, but rather would be diverted from the state’s general fund, which supports health care programs, the criminal justice system, higher education, and human services programs.

Some Proposal 1 proponents argue that the remaining $500 million is financed by expiring business tax credits. However, these expiring business tax credits were already scheduled to expire, and should not be counted as “new revenue”.

Michigan faces a long-run budget problem. The state’s tax revenue grows slower than the state economy, while spending pressures grow faster than the state economy. Proposal 1 worsens this problem by about $500 million per year. This loss in revenue could reduce state services, which could worsen the state’s economic competitiveness, even with lower personal property taxes.

Voters face this choice: if Proposal 1 passes, the state’s budget situation will deteriorate and services are likely to suffer. If Proposal 1 is voted down, it is possible that the state legislature will re-enact personal property tax elimination without replacement revenue for local governments.

This would be disastrous for local services. Alternatively, perhaps a defeat of Proposal 1 will lead to personal property tax reform with full replacement revenue, which would be preferable, and yet the state could not come up with how this might be done this year.

Regardless of what happens to Proposal 1, Michigan faces significant long-run budget challenges. The news media, outside public interest groups, and state policymakers need to focus more on the long-term budget issues facing the state, and possible tax and budget reforms to deal with these issues. We can’t keep kicking the can down the (pothole-strewn) road.

Do you have a guest column on a statewide topic to share? Email Director of Community Engagement Jen Eyer at jeyer@mlive.com.